Geithner Previews Goals For Revamping Financial Market Rules

Treasury Secretary Timothy Geithner on Wednesday revealed more about the Obama administration’s views on regulatory reform and said he would be providing greater detail on these issues when he testifies before Congress in two weeks. His comments came during a briefing with reporters as he prepared for the G-20 meeting of finance ministers this weekend.

Mr. Geithner said U.S. and foreign officials might set up “guidelines and principles” for compensation practices to address what he referred to as pay policies that were completely “divorced” from the risks financial institutions were taking in the lead up to the financial crisis. “I think there’s a shared sense, certainly across the major economies, that reforming compensation practices and the incentives they produced for risk taking is a necessary and important part of financial reform.”

A major part of overhauling financial market rules will be tackling the country’s biggest institutions, which Mr. Geithner defined as “those that pose potential risks to the stability of the system.” Mr. Geithner said these companies need “more effective, carefully designed constraints on leverage,” which could mean much stiffer capital requirements.

He proposed fundamental reforms to the way banks are required to hold capital, pushing a measure that would require banks to build up capital during good times so they can draw it down during bad times.

He also said there would be beefed up reforms to consumer protection and market integrity. “We are going to have to consolidate and streamline the overall oversight framework around that,” he said.

He suggested the Federal Reserve might be the best entity to fill the role of a regulator to monitor systemic risk. “The Fed is now the primary supervisor of bank holding companies n the United States,” he said. “And I think that what’s really important is we have a strong accountability vested in an institution that has the capacity, the talent, to again bring the level of consolidated supervision necessary to make sure that these major institutions don’t pose this kind of risk to the system in the future. And the Fed is a natural place for that responsibility.”

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